Game of Towers: unpacking the Zambian Landscape
As the telecommunications sector in Zambia evolves it will break up into a number of related services traversing different “industries”. We saw operators “out source” service centres, data centres, active and passive network services, “franchise” retail shops and now “sell off” their towers.More is yet to come as operators move more towards the Beverage model (Coca-Cola, Heineken, Carlsberg, Pepsi) where you own the brand not the “factory”. You focus on the “brand” and the “front office” whilst third party experts take care of the “back end”.
This change only brings up more evidence that the nature of competition has changed from industries to arenas. Yes arenas and not industries, markets or segments. Mark that word – the whole essence of this article.
Cross-cutting and multiple layer businesses now mean business are not bound by their traditional industry classifications. This in itself will bring into play a number of challenges, as regulation will always follow innovation. Albeit with a lag as Policy-makers usually are dogmatic in their approach and do not have the foresight to address consumer or industry needs. They would rather play POLICE than facilitator.
Let the Games begin! Earlier this year there were a number of formal announcements, IHS acquiring MTN Zambia towers (+/-1000) , Airtel Zambia’s towers (+/-1200), extra ordinary AGM seeking shareholders consent for the establishment of Zambia Tower Limited. Zamtel has remained silent on the tower issue but has continued to dig up Lusaka and lay fiber optic cables. The question is why mobile operators are selling off their tower businesses in Zambia and what does this mean to the new telecommunications landscape.
We offer you some insights as to the impact and why:
1. Non-Core business. This is a real estate business. It entails acquiring or leasing land for the purposes of erecting a tower or communication mast. The premises are then offered to rent to any business requiring using the elevated towers to put up their antennae. Such businesses include but are not restricted to radio stations, NGO’s, ISP’s and of course mobile operators. In return the Tower operator provides power, security and space on the tower for a rental. It makes sense then to allow real estate experts to manage this arena, as they are best suited to do so. In the arena sense of things, the arena is real estate and in it Real Estate developers, managers, service providers – fixed and mobile infrastructure, all work to ensure their businesses are capturing fair value of the market by focusing on their key competencies, whilst maintaining a Vendor – Client relationship that allows them to assure their clients of continued service.
2. Cash flow improvement. One of the biggest assets on a mobile operators balance sheet is tower infrastructure. The estimated sale value of a tower and auxiliaries set up would be +/- USD150 000 each at 1000 towers this is USD150 million. A cash injection of that nature into the business would significantly change the balance sheet dynamics and fundamentals. Beyond your the basics of Finance this money can be used for existing or new business projects with a higher return or for investments in other ‘arenas.’ However not all transactions are for outright cash. Operators will maintain some form of equity in these tower companies for security of tenure and to have some form of control on the ultimate business decisions. Overall it still has positive cash flow implications. What happens to this cash injection is key, does it go into the expansion or introduction of LTE or does get used to service debt. We wait patiently to see the results.
3. “De or Re – Regulation”. Taking the towers out of the telecommunications “industry” has moved this sector outside the realms of ZICTA. Other regulating bodies such as Real Estates and Civil Engineering now have jurisdiction over the towers. Rents cannot be regulated by ZICTA as the Tower businesses are not telecommunication providers. They are now “landlords” and commercial rents will apply. Tower rental prices and agreements on tower sharing have always been a thorny issue among operators. ZICTA was poised to dictate rentals the same way they did on Inter Connect Charges, which left the bigger operators with big revenue deficits from this source. How this is managed going forward is a point of interest. This whole new arena means now the Zambia Revenue Authority can move and enforce its registration of landlords, while the (Civil) Engineering body and Local Councils can have better oversight on standards and conditions of ‘public’ infrastructure such as towers, under-ground fibre, antennae on top of buildings, etc.
4. Ease of entry. Probably the biggest opportunity provided by this development is the ease and speed of entry of a new comer into the Zambian market. Firstly you can design the most efficient network with the optimal coverage and fewer towers as you get to pick the best locations available from all Tower companies. Further, you have flexibility to come on and off a tower maximizing your position all the time. This in itself is newcomer heaven.
The single biggest barrier to entry has been dropped. I shudder at the speed of deployment, what took operators years to build and cover will be covered in a matter of months! Welcome Vodafone! Welcome Vietnam Telecom! Out goes Statutory Instrument No. 111 of 2009 and this market is on fire! In this space of the arena, it is no holds barred as those with the money will acquire strategic and well-positioned real estate for tower deployment. Those who are playing to win in this game will do so knowing the turf has changed and those who move expediently win.
5. Efficient use of resources. Probably the single biggest criticism of mobile operators was the lack of co-operation in the locating of towers. It is not unusual to see 3 towers within a 20m radius of each other. The only person benefiting from such an arrangement is the landlord who owns the land with 3 tenants. This wastefulness and adds to the cost of doing business, which has been the perennial cry of operators as one of many reasons for not reducing headline tariffs. With Tower companies we should see less of this triplication and the relocation of some of these towers to other areas.
6. New Tower players. Huawei have entered the passive infrastructure game in a big way. Having been awarded the ZICTA rural tower contract for 168 towers this makes them a strong proponent in this arena. Needless to say that Huawei is the preferred partner for the MTN active network and also one of the main installers of metro fiber ring in Lusaka. Huawei are also the preferred LTE partner of MTN and Airtel Zambia, which puts them in a very commanding position. It is not unheard of active equipment suppliers becoming operators themselves to show case their equipment and services and then later onward selling. This development will be watched in this changing landscape. In this way one has to give Huawei a thumbs up on positioning themselves as a one-brand, one-stop shop for devices, network equipment supplier, network deployment and managed services, and software to run all this for the business, home, entertainment and security arena.
7. CAPEX vs. OPEX . By paying rent for tower space the cost is included in the income statement and is deductible from profits hence operational expenditure (OPEX). The tax advantage of capital expenditure (CAPEX) has long since been exhausted as most operators have been in existence for over 15 years. Whatever gains could have been written off against the original investment have since been enjoyed. There is no real reason to keep such assets in their accounting books. The depreciation aspect would have been weighed against site rental. Investors prefer operational excellence as a good parameter to measure a business performance as this is a monthly evaluation parameter. The winner in terms of OpEx efficiencies and other achievable improvements in expenditure vs revenue will eventually ride off into the sunset owning the Towers Kingdom.
Its Game ON in Zambia, who sits on the “Telecom” throne and rules the 11 provinces, will be very interesting. What further twists in the evolution ICT in Zambia wait to be seen? Don’t go away, simply watch this space for details as the Saga unfolds!